Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980
United Nations Convention, 3rd ed. (1999), pages 426-436. Reproduced with permission of
the publisher, Kluwer Law International, The Hague.

This article addresses problems like these: (1) A seller has agreed to deliver goods on credit but, prior to the time for delivery, the buyer becomes insolvent or otherwise has manifested an inability to pay for the goods. (2) A buyer has agreed to pay before receiving the goods but, prior to the time for payment, the seller’s insolvency or some other circumstance makes it apparent that the seller will not deliver the goods.

Does the law afford protection for the party who is threatened with a failure of performance by the other party? May the party facing this threat suspend its own performance? (Avoidance prior to the date for performance is governed by Article 72, infra.)

"(1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of:

(a) a serious deficiency in his ability to perform or in his creditworthiness; or

(b) his conduct in preparing to perform or in performing the contract.

"(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though [page 426] the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.

"(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance."

Paragraph (1) applies to a threat of non-performance by either party. Paragraph (2) applies to a specialized situation—a threat of non-payment that becomes apparent while goods are in transit.

In limited circumstances (examined infra at §387), paragraph (1) authorizes a party to suspend the performance of obligations such as delivery of the goods (Arts. 31–34) or payment of the price (Arts. 54–59). Article 71(1) also has a broader reach. For instance, the contract may require the seller to procure or manufacture goods described in the contract; when it is apparent that the buyer will not be able to accept delivery and pay for the goods, the seller may suspend procurement or production. Similarly, when it appears that the seller will not be able to deliver the goods, the buyer may suspend required steps leading toward payment, such as the establishment of a letter of credit (Art. 54).

The contract and the Convention may require other preliminary steps leading to final performance. See, e.g., Art. 32 (shipping arrangements), Art. 34 (handing over of documents), Art. 54 (required steps such as establishing a letter of credit), Art. 65 (supplying specifications for goods). Failure to take these steps may constitute a breach of contract, not merely a portent of a future breach; in some cases the breach may be sufficiently serious to justify avoidance (Arts. 49(1)(a), 64(1)(a)) or a Nachfrist notice (Arts. 47(1), 63(1); see §323, supra). However, if the aggrieved party is hopeful of obtaining performance or if grounds for avoidance are not clear, the aggrieved party will prefer a less drastic approach such as suspension of its own performance.

Article 71 does not authorize a seller to dispose of goods held for the buyer nor does it authorize a buyer to purchase goods to replace goods to be supplied by the seller; under Article 75, infra, these remedies apply [page 427] only when the contract is avoided. The point is significant since avoidance of the contract by one party because of prospective failure of performance by the other (Art. 72, infra at §395) is subject to standards that are more strict than the standards that Article 71 applies to suspension of performance.

Grounds for suspension provided by the 1978 Draft Convention were revised by the Diplomatic Conference. The revised language presents delicate problems of interpretation; a review of the legislative history seems advisable.

The more important change in the 1978 Draft narrowed the grounds for suspension. This draft authorized suspension of performance by a party who has "good grounds to conclude that the other party will not perform a substantial part of his obligations." At the Diplomatic Conference the representative of Egypt, Professor Mohsen Chafik, criticized this language on the ground that it gave excessive effect to the subjective view of one party. To meet this problem Professor Chafik proposed that provisions of the article on suspension (then Art. 62, now Art. 71) and the following article on avoidance for anticipatory breach (then Art. 63, now [page 428] Art. 72) should be combined. Under this proposal, if it "becomes apparent that one of the parties [Party A] will commit a fundamental breach of contract," the other party [Party B] may give notice that he intends to suspend performance if Party A fails "to provide adequate assurances...of properly performing his obligations"; if Party A does not provide this assurance, Party B "may declare the contract avoided." This restriction of the right to suspend performance received substantial support on the ground that it was important for the protection of developing countries but, on an equally divided vote, failed to be adopted. Concern lest this decision might impede adherence to the Convention led to the appointment of an ad hoc working group of ten countries to develop a compromise solution. A revised text developed by this group became Article 71 of the Convention.[3]

When a party proposes to suspend performance what degree of certainty is required by the phrase "it becomes apparent that the other party will not perform a substantial part of his obligations?" Certainly the new language meets the objection that the 1978 Draft authorized suspension based on mere subjective fear. Does Article 71(1) restrict suspension to cases where there is objective certainty that the other party will not perform?

This latter construction is subject to two objections. In the first place, the conference rejected the proposal to assimilate suspension under Article 71 with avoidance of the contract under Article 72, and took pains to preserve different language authorizing these different remedies. Suspension under Article 71 is permitted when "it becomes apparent" that a party will not "perform a substantial part of his obligations"; avoidance under Article 72 is authorized only when "it is clear" that a party will commit a fundamental breach of contract.[4][page 429]

A second objection derives from Article 71(3). As we shall see (infra at §391) a party suspending performance must notify the other party of the suspension "and must continue with performance if the other party provides adequate assurance of his performance." Thus, circumstances that make it "apparent" that the other party will not perform need not establish a certainty of non-performance since the initial appearance may be modified by clarification of the situation or by the removal of the initial barriers to performance.[5]

In sum, under Article 71(1) subjective fear will not justify suspension; there must be objective grounds showing substantial probability of non-performance.

"(1) A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return...

"(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract."

The UCC’s provision on suspension resembles Article 71 in that it protects both sellers and buyers, but the grounds for suspension are broader than in the Convention since UCC 2–609(1) protects a party’s "expectation" of receiving due performance and applies when "reasonable grounds for insecurity arise."[7]

The German Civil Code §321 also provides for suspension in a seminal provision that has influenced legislation elsewhere:

"If a person is obliged by a mutual contract to perform his part first, he may, if after the conclusion of the contract a significant deterioration in the financial position of the other party occurs whereby the claim for the counter-performance is endangered, refuse to perform his part until the counterperformance is made or security is given for it."[8]

The above provision resembles Article 71(1) of the Convention and UCC 2–609 in that it can protect either the seller or the buyer but is narrower in two respects. It applies only when one person is obliged to "perform his part first" and thus might not authorize suspension of manufacturing when the contract provided for concurrent exchange of goods for the price.[9] Moreover, the right to suspension arises only on [page 431] "deterioration in the financial position of the other party"; the Convention and UCC 2–609 do not so limit the circumstances that give rise to insecurity.[10]

Unlike paragraph (1) which is available to both parties, paragraph (2) addresses a special problem that is of concern only to sellers—a threat to payment that becomes evident after the goods have been dispatched. Paragraph (2) provides that in specified circumstances the seller may prevent the carrier from handing over the goods to the buyer.

This right is available without regard to whether risk of loss has passed to the buyer: Transit risk normally passes to the buyer when the goods are delivered to the carrier (Art. 67(1), §§364-365, supra) so that the Convention’s rules on risk of loss would virtually nullify its rules on stoppage; in addition, Articles 67(1) and 71(2) address problems that are functionally distinct. For similar reasons domestic rules that "property" or "title" has passed to the buyer may not undermine the narrow and specific rights conferred by Article 71(2). The Convention has rejected the use of such general concepts in determining the mutual rights and obligations of the seller and buyer (Art. 4(b), §§28, 70, 358); on the other hand, Article 71(2) (last sentence) provides that the seller’s right to stop delivery to the buyer does not impair the rights of third persons.

Paragraph (2) will be useful only in an unusual combination of circumstances: (1) The threat of non-payment is discovered after the goods are dispatched and before they are handed over, and (2) The seller has not retained control over the goods, as by the retention of a negotiable bill of lading (Art. 58(2)). Comparable provisions on stoppage in transit are contained in domestic legislation.[11]

The provisions on stoppage in transit in Article 71(2) of the Convention reflect a substantial revision of ULIS 73(2) and (3). ULIS attempted to deal with the effect of stoppage in transit on the rights of a third person who is a "lawful holder" of a document of title. This attempt proved to be inadequate; instead, Article 71(2) of the Convention provides that it "relates only to the rights in the goods as between the buyer and the [page 432] seller." Whether a third person has acquired rights in the goods that would override the seller’s right to prevent delivery to the buyer would depend on applicable domestic law, akin to the rules protecting the property rights of good faith purchasers. As we have seen, Article 4(b) excludes such issues from the scope of the Convention.[12]

The fact that Article 71(2)’s rules on stoppage relate only to rights "as between the buyer and the seller" does not make this provision as feeble as might be supposed. Cf. Bennett, B-B Commentary 520–521. True, the Convention does not state that when Article 71(2) applies the carrier must deliver the goods to the seller; the carrier needs protection lest some third party in good faith might have purchased the goods (or documents representing them) and thereby acquired rights to the goods that are protected by applicable domestic law. On the other hand, Article 71(2) states that the seller may stop delivery "even though the buyer holds a document that entitles him to obtain them"; under this language the seller may stop delivery even though the buyer holds a negotiable bill of lading or other document controlling delivery.[13] In this case, to protect the carrier, the seller by an appropriate proceeding should require the buyer to deliver the documents to the seller or to the carrier. See Arts. 62, 71(2).

Even a third party who holds documents that control delivery may not have rights under domestic law that would cut off the seller’s right to the goods. The essential point is that domestic law can be expected to honor the seller’s rights against the buyer established by Article 71(2) and give the seller as much protection against third persons as domestic law accords to other persons in the seller’s position. The carrier, of course, can have no objection to delivering the goods to the person who is entitled to them if the procedures suggested above protect the carrier against third-party claims. (In any case the carrier is normally entitled to receive any unpaid freight before delivering the goods.)

A seller’s right to stop delivery is not limited to "suspension" of performance under Article 71(2). Assume that a buyer commits a fundamental breach (failure to pay; repudiation) while the goods are in transit. The seller may thereupon avoid the contract (Art. 72, infra, Art. 64, §§353-356, supra) and may reclaim the goods to enforce the right (Art. 81(2), §444, infra) to "claim restitution" of what has been supplied under [page 433] the contract. Here, as under Article 71, the seller may be subject to the rights of third parties based, e.g., on good faith purchase.

Reassuring words alone cannot provide "adequate assurance" of performance: under paragraph (3) a party notified of suspension must provide evidence of concrete facts or action that removes the threat that he "will not perform a substantial part of his obligation" (Art. 71(1)).

Threats of non-performance may develop under a wide variety of circumstances; the range of remedial steps can only be suggested. For example, where a buyer has suspended payment of his current obligations adequate assurance of performance may, in some circumstances, be provided by proof that the buyer has reestablished current payments; in other circumstances "adequate assurance" may call for the issuance by a bank of an irrevocable letter of credit. Threats to continued performance by the seller resulting from a strike or the loss of a source of necessary materials may be removed by showing that the strike has been settled or that a new source of materials has been obtained. Developing an adequate solution to such problems calls for good faith consultation between the parties.[14]

Must a party who is subject to suspension provide assurance of perfect performance? Suppose that the assurance shows that full performance will occur but after a slight delay. Continued suspension of performance is closely akin to avoidance of the contract; the answer to the above question should be consistent with the principles on avoidance in Article 25, 49, 64 and with the rule of Article 71(1) authorizing suspension only [page 434] when there is a threat of nonperformance by the other party of "a substantial part of his obligations." An assurance under Article 71(3) should be "adequate" even if it involves an insubstantial nonconformity in performance. Accord: Bennett, B-B Commentary 523; Strub, supra n.3, at 496. Of course, a party in breach must compensate the other party for damages (Art. 74); the likelihood of even minor damages may well call for adequate assurance for the payment of the damages. See Art. 25, supra at §184.

Assume that a party, aggrieved by a threat of non-performance, justifiably suspended performance. The other party then provided "adequate assurance" of performance so that the aggrieved party became obliged to resume performance. Is the aggrieved party held to the initial time-schedule specified in the contract?

The Convention and the rules of domestic law set forth, supra at §384, do not address this question. It seems that, at least in some circumstances, the right to "suspend" performance must carry with it an extension of the time for continued performance. Suppose that a contract made on June 1 requires the seller to manufacture goods to the buyer’s specifications and deliver them on September 1. On July 1, before the seller has had time to manufacture the goods, the seller is entitled under Article 71(1) to suspend performance. The seller immediately notifies the buyer of the suspension but the buyer does not provide adequate assurance of his performance until August 15. If completion of manufacture would require a month the right of "suspension" would be nullified if the seller must deliver the goods by September 1. The problem calls for a reasonable adjustment to the new situation.[15] The seller may not always need an extension of time that is equivalent to the period of the suspension; helpful suggestions for solving these problems are available in domestic legislation.[16][page 435]

Assume that Party A is aggrieved by a threat of non-performance by B and properly suspends performance but B fails to provide adequate assurance. A may continue to suspend performance but how will the contract relationships finally be resolved?

When the time for B’s performance passes and B still fails to perform, in most cases A may avoid the contract and claim damages for non-performance. Arts. 25, 49, 64 and 81. However, A may not need to wait for the time specified in the contract for performance; B’s failure to respond with assurances of performance may make it "clear" that B will commit a fundamental breach of contract [17]—a ground for avoiding the contract under Article 72, which follows.[page 436]

2. O.R. 374–376, Docy. Hist. 595–597, see Schlechtriem, 1986 Commentary 92–93, for the perceptive observation that this change has the important consequence of excluding domestic rules granting avoidance (inter alia) based on mistake about capacity to perform. Schlechtriem also suggests (Cornell Symposium at 474 n. 23M) that Article 71 excludes domestic remedies for innocent or negligent misstatement as to ability to perform, such as an inaccurate financial statement supplied by one party on which the other party relies in entering into the contract. This latter suggestion may be questioned since the Convention does not address this factual situation. Contrast the discussion at §§239-240, supra, on the exclusion of domestic remedies for innocent misstatements of quality, which is addressed by Article 35 of the Convention. Moreover, Article 71 allows only suspension of performance and is subject to a stricter standard (inability to perform) than domestic law may provide for a contract obtained by a misstatement of fact. On the availability of domestic remedies for fraud see §65, supra.

5. Accord: Schlechtriem, 1986 Commentary 93, n. 383a; (citing first edition). Art. 72, infra at §395, under some circumstances, requires advance notification and an opportunity to provide adequate assurances of performance. Thus, breach may not eventuate even when "it is clear" that a party will commit a fundamental breach of contract.

14. Accord: Bennett, B-B Commentary 519–521. Art. 7(1) calls for interpretation of the Convention to promote "the observance of good faith in international trade" and Art. 7(2) invokes the "general principles" on which the Convention is based. As has been suggested (Art. 7, supra at §100) numerous specific provisions of the Convention seem to illustrate a general duty to communicate needed information to the other party.